The NASPP Blog

March 8, 2011

Withholding for Outside Directors?

A few weeks ago, a paragraph caught my eye in a McGuireWoods alert about President Obama’s revenue proposals for 2012. Under the proposals, independent contractors that receive more than $600 per year from a company would be able to require the company to withhold federal income tax on their payments. Contractors would not only be able to require the withholding but would also be permitted to determine the withholding rate.

I know, I know–you can’t imagine that any contractors would actually want taxes withheld and some of you are also thinking that your company doesn’t grant awards to contractors so this doesn’t apply to you. But, you might want to think again. As far as I know, the tax code doesn’t distinguish between different types of non-employees. You either are an employee or you aren’t. So while the proposal uses the term “independent contractor,” it’s possible that, when implemented, this would also allow outside directors to request that taxes be withheld from their compensation.

Which is interesting because a number of stock plan administrators have told me their outside directors want taxes withheld on their stock awards. Usually the directors want to use some of the stock in their awards to cover the taxes, either through share withholding or a sale of the award shares. In some cases, they also just don’t want to hassle with estimated tax payments.

Thus, I think there’s a reasonable possibility that some outside directors would avail themselves of the opportunity to have the company withhold taxes. Of course, share withholding would still be a problem–since the withholding is voluntary, any taxes that are withheld would be in excess of minimum statutory withholding rates, triggering liability treatment under ASC 718 in the event of share withholding. (If the directors sell their award shares on the open market to cover the taxes, liability treatment won’t be a problem. Likewise, of course, if the directors pay the taxes in cash–but that’s no fun.) While companies would be forced to accommodate the withholding request, they presumably would not have to allow the directors to utilize share withholding, even if they allow share withholding for employees.

It has also occurred to me that this might be a way for non-employees to flaunt the estimated tax payment system. Non-employees holding stock options might skip making any estimated payments throughout the year and, at year-end, exercise an option and have the company withhold enough of their proceeds to cover the tax payments they should have made earlier. We’ve seen this type of behavior before–see my Dec 9, 2008 blog, “Excess Tax Withholding – Part 2.”

No Need to Panic Yet

We are a long way from this being a reality–at this point, it’s just a proposal; who knows if it will ever come to pass. And there are many questions that will have to be addressed before it can be implemented, such as whether or not the proposal applies to all non-employees including outside directors or whether the IRS will somehow limit it to “independent contractors.” No need to start changing your procedures yet–this is just something to keep an eye on.

They’re Here
It’s always a little unnerving to get mail from the IRS, but this time proved to be nothing to worry about. My copies of Forms 3921 and 3922 have arrived. I was out of town for the past week, so I’m not sure exactly when they arrived. But, for those of you filing on paper (presumably you all requested a 30-day extension of the filing deadline), the forms are now available, in plenty of time to file by March 30. You can order your copies via the IRS website and you should receive them within 7 to 15 days.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara